I'm an entrepreneur, angel investor, venture capitalist, author and philanthropist. Most recently, I am the founder of Grow America, an organization dedicated to helping business builders nationwide and worldwide. I have an MBA and forty years of business experience as a CEO. I have launched ten companies. Four were failures. MarketStar, Island Park Investments and Mercato Partners are home runs. I currently have sixty investments in emerging start up firms. I know how to launch, grow and sell a business. I write columns on a range of entrepreneurial topics to teach and guide visionaries to realize their business dreams. I am passionate about building strong corporate cultures and coaching the next generation of exceptional leaders.

Obamacare And Entrepreneurs: What You Should Know; How To Prepare

Breaking News: The IRS has issued an interim final ruling on the 2.3% excise tax on medical devices as reported by Reuters. Device companies including 3M, Kimberly Clark and Boston Scientific are actively pushing U.S. Congress to repeal this decision, or to at least delay the start date until 2014. We will post further developments to this story as they occur.

As one of my ongoing roles, I am Chairman of Utah’s Technology Association, the Utah Technology Council (UTC). In a recent Trustee meeting, one of my associates, Kelvyn Cullimore, CEO of medical device company Dynatronics (NASDAQ: DYNT), provided our assembled leaders with perspective on what the coming changes of Obamacare will mean. He spoke particularly about the impact for organizations such as his own, that will be impacted by the proposed and expected medical device excise tax.

Dynatronics Inc. is a manufacturer of advanced medical devices

For all organizations, while much is still unknown as we approach the start dates, the implications of the Affordable Care Act (Obamacare) will be immense. Regardless of political views, there are aspects of the changes entrepreneurs must take into account as they plan their business and employment strategies for 2013 and beyond.

As Cullimore notes, medical device companies will be hit especially hard. Dynatronics is a company that employs 160 people. Their own situation is an interesting case study; however the issues they face will apply to many other organizations as well.

Kelvyn Cullimore is CEO of Dynatronics, an officer of MDMA, a trustee of the Utah Technology Council, and also serves as the Mayor of Utah's Cottonwood Heights

As a note – in addition to his role as CEO, Kelvyn Cullimore is active in the local political arena as he has also served for the past seven years as the Mayor of Utah’s Cottonwood Heights. He is also an officer and board member of the Medical Device Manufacturers Association (MDMA) in Washington DC, and through that role is engaged in advocating for industry issues with the Federal Government.

I have taken the chance to talk to Kelvyn at further lengths about his thoughts and plans in relation to the coming changes. In Dynatronics’ case, the company acquired several of its distributors in 2007 as a means to protect its distribution channel. After the acquisitions, the company was thankfully able to survive the extremely adverse market from 2008-2010. Coming out of the recession, the company made the strategic decision to invest more than $2 million in research and development to allow the company to innovate new products and to create profits the company would be able to recognize for shareholders in 2013 and beyond. While those higher R&D costs did significantly impact their profitability for the last two fiscal years, it has positioned them well for improved profitability in the coming years. As every entrepreneur knows, innovation is not only critical to survival, it is essential to sustained profitability.

On the whole, while Cullimore notes that few people would argue with the benefits of eliminating limits on insurance due to pre-existing conditions and allowing children to remain on their parents’ insurance to age 26, the cost of enacting Obamacare’s changes is estimated to exceed $2 trillion over 10 years. The money to cover these costs is designed to come from two places:

1) Reducing the scheduled increases in future benefits in Medicare, and

Of particular interest to companies such as Dynatronics is the coming excise tax on medical device companies. This 2.3 percent tax is particularly frightening because it is levied on top-line sales, even if the respective company doesn’t earn a bottom-line profit in a given year.

The medical device industry comprises some 409,000 direct jobs and close to two million indirect jobs, according to the Medical Device Manufacturers Association (MDMA), 80% of these companies have fewer than 50 employees. Only 10% have 500 employees or more.

“In this sector, the profit threshold is not usually crossed until a company achieves $25-50M revenue,” Cullimore stated. “For a complex device, a company may need to gross $100M before they are posting a profit. In either case, many of these companies must incur an operating loss for several years as they pioneer the next generation of life-improving devices. Now they must add to their working capital needs the resources to pay an excise tax which will have the effect of moving the goal line of profitability even further.”

For those medical device companies who are making a profit, the 2.3% excise constitutes “a tax within a tax.” For a company making an 7% pre-tax profit, for example, the 2.3% excise tax would comprise 33% of their entire net profit – and that price tag would be in addition to the regular income taxes they may owe on their earnings. Very literally, it amounts to a tax on top of a tax.

Fox News agrees with Cullimore’s assessment: “…this looming $20 billion tax is already causing small business job loss and cuts to research and development budgets…..When Congress taxes the sale of a specific product through an excise tax, as the Affordable Care Act does with medical devices, it too often disproportionately impacts the small companies with the narrowest financial margins and the broadest innovative potential. It also pushes companies of all sizes to cut back on research and development for life-saving products.”

As a case study, in Dynatronic’s case, had this excise tax been in effect during 2012, the company that had only broken even would have had to come up with an additional $400,000 to pay in excise tax to comply. Where would that money have come from? Says Cullimore, the company would have had to raise the price of its products (in a market that would likely not tolerate more than the smallest of increases). It likely would have had to limit investment in R&D as well as consider other cost reductions including layoffs.

Decreasing the amount of research and development would have decreased the amount of innovation the organization could bring to the fore. And as previously stated, innovation is a critical fuel to sustainability and producing the technologies that will ultimately make health care more affordable.

Another functional outcome Cullimore predicts: the excise tax will force an increasing number of organizations “on the bubble” under these additional expenses to consider offshore manufacturing. Yes, they will still be subject to the excise tax for products sold in the United States—but in desperation they will hope that the cost savings of taking the labor offshore will at least to some degree offset the additional cost of the tax.

“This is an outcome that will cost American jobs,” he observes. “While strategies like offshore manufacturing, reducing R&D and reductions in force will help the medical device companies offset the impact of this egregious tax, it will simultaneously reduce the number of U.S. jobs and significantly stifle innovation – and it is innovation that will help ultimately bring down the cost of healthcare.”

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Yup here we go again and companies are smart and will use business intelligence to find a way to pay the tax to exist as well as other methodologies of layoffs and so forth.

You can read my opinion if you like but this is loser as when the law was written things were different so no witch hunt here, just a time to take another look at how the impact is today. This is just opening up a whole new breeding ground to create more data sellers. It’s the easiest and low risk choice out there as you hire a few technologists to format the data for sale and off you go with anonymized and perhaps some that is not for sale.

This is also why they don’t expand and build new factories as they can easily sell data and make more money without the headaches of employees, etc. It is a sad state of affairs. The data selling business is where an excise tax belongs for a few reason, #1, it is a huge pool of money to tax and it’s also getting abused with combining credible with non credible data to sell predictive analytics which adds to the flawed data we have out there, a growing problem. Watch the WSJ video and listen to Medtronic answer the direct question on whether or not they are going to start selling more data that devices create, see for yourself.

Of course this is a big loser for consumers too who want their data as if device companies can easily sell it to pay their taxes..what do you think they will do?

When they sell it, the entity who buys it now will be looking to query with other data and this is where the flawed data and Algo duping appears as who knows what other linear or non linear data will be rolled in here. I use the FICO bogus sale of analytics as the perfect example as they sell to insurance and pharma a set of numbers that take your credit score and combine it with other information they mine ad don’t disclose their sources to come up with this “magic” that hurts consumers as they go too far and bring this down to an individual scoring bases of 0 to 500 that will predict whether or not you will take your medications….huh you might say..yup that is out there.

Value is further substantiated with this panel of IT people from NASA and various other places on “value” with mining and queries with data and the gale from T-Mobile is spot on saying some of this is “silly” as she recognized it and so do a few others. Watch the video here and it’s good discussion with truth and reality with data and how it is used and/or abused too when used out of context and there’s no “real” value and of course when selling analytics every effort will be made to “create” value for money even if it really does not exist.

On my blog there’s a great video called “quants the alchemist of Wall Street and this a rare documentary as the quants tell you how they combine fiction in their formulas straight out withe banks. It along with a few other videos from folks smarter than me, but also know queries, math and so forth the bring real bottom line in. I used to write code in healthcare and know the mechanics and thus anyone with those skills can query anything they write, but again value is the deal here.

With that being said, what’s to stop the device industry to finding the solution with the lease amount of risk to pay their new tax bills, and we all lose on this one. We should be taxing the data sellers, and my Walgreen example her on how they made short of $800 billion selling data only in the year 2010 to give you an idea of how huge those profits are, and starting funding science at the NIH and the FDA with it as they need it. Someone has to start thinking out of the box pretty soon. I tweeted this to Francis Collins the other day maybe he might have some interest as it’s a solution to his budget cuts coming up.

I am not anyone out of the ordinary but as the old saying goes if you are not part of the solution, you might as well end up being part of the problem. Consumers could be a winner here too as with licensing and taxing data sellers using our existing sales tax model (except consumer don’t pay this one) it could be up and running pretty fast. It works that way when you start from scratch versus having to integrate with may IT infrastructures to build the basic solution. Along with the tax a federal site could be established with a responsibility of those who sell listing what kind of data they sell and who they sell too and we all want to know that as it is not transparent at all.

I even hinted this idea to the device business so I don’t know what they might do with it but in the interest of getting rid of it I think it could be wise to be armed with another choice to present that in the end might accomplish a whole lot more. Again this tax was derived when the economy was different folks still had a little more money so I think time to review it perhaps?

I especially appreciate Kelvyn Cullimore’s candor in sharing so much detail on how the law, as written, would affect his company and many others like him. Regardless of political affiliation – my hope is that the unintended consequences of many aspects of this legislation receive much more review before it is enacted. Thanks very much for sharing this insight.

Thank you for your note, Cheryl, and I hope so as well. It is my understanding that Kelvyn is highly involved in this process via the MDMA as well as at the helm of his own company. I wish their effort all success in protecting their critical market sector (as well as the jobs and revenue their businesses represent). Regards, Alan